Book Review: Epic Recession

How Did it Happen, How Bad will it Get?

By Carl Finamore

Submitted to portside

In the not too distant past, bankers, financiers and
investors could do no wrong. They were the wizards of
Wall Street, ushering in a new era of economic
expansion. But by around 2006, it became very clear
their magic was just an illusion. The only thing real
was millions of homeowners defaulting, millions of
pensioners watching their 401Ks evaporate and millions
of workers losing their jobs.

Investors and bankers didn't fare nearly as bad. They
seemed to just shut down their old hustle, moved on
down the road and reopened for business as if nothing
had happened.

Billionaire Warren Buffet's two rules to investors were
in full force and effect and backed up by the U.S.
Treasury: "Number one rule is to never lose money and
number two rule is to never forget rule number one."

In fact, big business pretty much made up its own rules
during the last three decades. Taxes for corporations
and the wealthiest were continually lowered and
regulatory obstacles to domestic and offshore
investments were eliminated. At the same time,
conversely, wages for the majority remained stagnant
since 1973.

Not surprisingly, a dramatic shift in wealth occurred
during this time. Forbes Magazine lists the 400
wealthiest Americans with a total net worth of $1.27
trillion. Their poorer cousins, the top one percent,
control 40% of our wealth if housing alone is excluded.

On the other hand, the majority is being squeezed more
and more and purse strings tightened. Simply put, the
average consumer has been losing ground in the last
thirty years.

Extensions of credit to family households concealed
this decline and kept the economy going until debt
burdens finally led to the current wave of defaults,
especially in the housing market where speculators
drove prices to unprecedented levels.

Too much money in the hands of too few fundamentally
led to the crisis, according to Jack Rasmus, a former
elected union official turned college professor and
writer, whose latest book, Epic Recession, Prelude to
Global Depression, has just been released by Pluto
Press.

"A massive amount of liquidity in the hands" of
"wealthy individuals, their various investing
institutions like hedge funds, private equity firms,
private banks" and corporations have created over the
last three decades a "global money parade...that sloshes
around the global economy in pursuit of the greatest
short-term returns, which in recent years have become
increasingly speculative in nature."

Rasmus cites 2006 statistics that reveal both the
relative value of global financial assets and their
infinite variety such as cash, stocks, bonds, options,
certificates of deposit, commercial paper, money funds,
foreign currency, precious metals, commodity futures,
derivatives, redeemable insurance contracts, accounting
receivables and more.

The endless, toxic brew of financial cocktails
outstripped the world's total production of commodities
by a factor of three. In the United States, it was
worse, the enormously lucrative financial sector
accounted for four times the Gross Domestic Product
(GDP), a measure of all the goods and services produced
in this country.

Numerous investment schemes were concocted to attract
this excess glut of global capital that saw more profit
in paper transactions than in production of real goods
and services. As demand for speculative ventures
multiplied, so did the stock market.

The Dow Jones jumped an incredible 8000 points from
1994-2000, the largest leap in its history. All seemed
to be going good, too good as it turned out. Little of
real, hard physical value was being produced as the
global economy was awash with trillions of dollars in
the pockets of the wealthiest among us, all swimming
toward the next big speculative venture.

Cracks began to appear during the Asian currency crisis
and the Dot.com bust of the last decade, creating what
billionaire financier George Soros described as a
"longer-term super bubble." But, thinking they held
all the cards, the Federal Reserve Bank threw more
chips into the pot by dramatically lowering interest
rates.

The Fed often worked this way by making sure the money
faucet flowed anytime Wall Street got a little thirsty.

With more money on the table, banks in the first years
of this decade actually aggressively pursued home
buyers just to keep the casino doors open. More home
buyers meant higher home prices meaning even more eager
purchasers of mortgage-bundled investments. With new
blood in the water, the feeding frenzy by speculators
continued.

Thus, warning tremors were ignored as profits continued
to flow. Few recognized or wanted to admit that the
economy was built on shallow landfill unprepared for
the next "Big One" to hit.

However, when consumers could no longer afford the
skyrocketing price of a home, the hot item topping the
menu of speculators the last few years, the housing
market finally collapsed. The resulting sag in home
purchases in 2006 was compounded by the growing number
of defaults, thus triggering an enormous free fall of
the fragile financial structures that depended so
heavily on the fantasy that home prices would steadily
and endlessly increase.

How did this Happen?

New financial packages were developed in the U.S.
housing sector that profited enormously as each
mortgage of the original physical asset, a home in this
example, was bundled together with assorted other stock
portfolios, hedge funds and securities that was passed
along a chain of sellers and buyers. Each investor
profited from every subsequent exchange even as the
paper trail extended far beyond the initial real,
material asset of the home.

Speculators of home mortgages both produced and greatly
benefited from the surge in housing prices. In fact,
higher home prices were essential to maintaining the
profitable sale and resale of these bundled mortgage
investments to new investors climbing on board.

As is the nature of Wall Street thrill seekers, no one
believed the ride would end.

In fact, to keep the wheel of fortune turning, lenders
began desperately and aggressively offering no interest
home loans to credit-deficient working people who
subsequently defaulted when the Federal Reserve Bank
began raising their credit line from a floor of one
percent to over six percent after 2003.

Hundreds of thousands of defaulting families, often
portrayed by Wall Street apologists as causing the deep
recession, are really the victims and pawns of these
shady pyramid schemes.

The whole scheme depended on housing prices rising and
this worked for awhile as speculative demand for
housing derivatives increased. But, at some point, the
material asset of a home, for example, must actually
correspond to a more real set of values.

Rasmus makes the point that supply and demand
restraints do not equally apply to speculative
ventures. In fact, it is demand that is the driving
force there and as demand grew for the sale and resale
multiple times of home mortgages to investment firms,
for example, so did the price of each subsequent
transaction escalate. Profits and fees were added
along each step, thus, also driving higher the price of
homes.

The price of the real, physical entity of a home,
unlike its various speculative paper derivative
counterparts, however, is affected by market supply and
demand as Rasmus explains. So, when home prices
outdistanced the ability of cash-strapped and
debt-ridden consumers, a cascade of defaults resulted,
adding to the housing glut and leading to dramatic
declines in home prices.

The boom finally went bust. But Buffet and the other
billionaires are still smiling. They either profited
enormously in those years or were bailed out by the
Bush and Obama administrations that subsidized several
trillion dollars of losses of the 19 largest banks and
investment firms in the United States.

But not one dollar was extended by the government to
homeowners directly. In effect, nothing has been done
to solve the underlying problem which is that working
families have become chronic under consumers. The
problem is acerbated since being deprived of credit
which was the one life line to compensate for lower
wages and higher health care costs.

The author does not, therefore, exclude the economy
descending even further. The current situation is
nothing more than a holding pattern, a stalemate that
only temporarily avoids descent into depression. The
fragile banking system was beefed up but little has
been done to rebuild the deteriorating condition of
worker consumers in this country and no recovery is
possible without this being addressed.

Depression of Recovery?

Not surprisingly, the former labor organizer offers a
political theme in his final chapter recommending
solutions. In it, he expresses more confidence in a
rejuvenated union movement that champions working class
economic and social reforms than he does in the
politicians in Washington who have amply demonstrated
their class bias favoring banks and investors.

The book contains descriptions of several other epic
recessions in our past such as in 1907-1914 and
in1929-1931 where little or no government spending on
jobs led to what the author calls severe "consumption
fragility," setting the stage for long-term stagnation
on the road towards a full blown depression.

These economic catastrophes were only averted by
massive government spending leading up to WW1 and WW11.

For Rasmus, turning the economy around today means
learning from these experiences by, first, closing the
widening gap in wealth between the top and the bottom
and by, secondly, investing that surplus directly into
productive sectors of the economy.

It starts with substantial tax reform of capital
income.

For example, the huge state deficits of California and
New York could be wiped out today by applying a one
percent tax on the top one percent of their wealthiest
residents. Many European countries do this.

With a correct tax program, there would be no national,
state or municipal deficits. In fact, there would be a
tax surplus resulting from more working people employed
and earning a decent living.

It would shift the side-tracked political discussion in
this country away from using existing deficits, mostly
induced by war spending and bank bailouts, as an excuse
to halt government spending on jobs and social
programs.

"These are key political points," Rasmus told me, "that
must be raised and discussed more, otherwise folks will
think the only alternative is to cut the deficit which
means immensely more pain for the working class and,
inevitably, a descent into depression"

His other solutions include nationalization of key
banking transactions to provide no-interest home loans,
the same benefit provided to bailed-out banks and
investment firms.

The fraudulent nature of the economic boom of the last
decade has been exposed.

The book explains how it happened, how previous
recessions and depressions arose and abated, how
dramatic structural changes of the economy must go well
beyond reinstituting needed banking regulations and how
the government should acquire funds through a fairer
tax system and then spend these trillions of dollars
for social programs and jobs to upright a thoroughly
imbalanced economy tilted toward the super rich.

The reader is conveniently provided three distinct book
sections which can each be read independently: a
discussion of broad economic theory, a description of
U.S. economic history and an analysis of the causes and
solutions to the current epic recession. The
introduction gives an excellent overview of all three
of these chapters.

Thus, the author is the exception to George Bernard
Shaw's observation that "if all economists were laid
end to end, they would not reach a conclusion." On the
contrary, Professor Rasmus has plenty of opinions, all
fact-based, and plenty of conclusions, all
well-documented.

But the author does face the obstacle wittily noted by
another famous authority, the late liberal American
economist John Kenneth Galbraith who once wrote that
"economics is a subject...resonant with boredom. On few
topics is an American audience so practiced in turning
off its ears and minds. And none can say the response
is ill advised."

Students, workers, social activists, and those who
simply want to examine more closely the collapsing
world economy dramatically affecting us all, would be
well advised to plunge ahead. To be sure, this is not a
happy face book that can be read leisurely with your
Ipod blasting away. This is a scholarly work on a
serious subject that deserves to be studied
thoughtfully. This does not mean it is too difficult to
understand.

On the contrary, the book shatters the mystique of
economics. Human decisions, not Adam Smith's legendary
"invisible hand," have brought us to the brink of
disaster. If you want to understand better the world
around us, better understand the current turmoil
engulfing us and better understand and even anticipate
future events that lie ahead for us, Epic Recession
belongs on your bookshelf.

===

Carl Finamore first met then-CWA Business Agent Jack
Rasmus some thirty years ago when Rasmus was leading a
militant strike in Oakland, California. Company
security thugs unexpectedly rushed a small strike rally
and tried to break it up. Pickets reacted immediately.
The goons were literally picked up and thrown out on
their ears with their surveillance film equipment flung
in all directions. Finamore never tires of retelling
that story. He is a delegate to the San Francisco
Labor Council, AFL-CIO. He can be reached at
[log in to unmask]

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